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PricewaterhouseCoopers LLP was negligent in its audit of an Alabama bank that failed
during the financial crisis in 2009, leading to losses of between $1.2 billion and
about $2 billion, a U.S. district court ruled.

The Federal Deposit Insurance Corporation won the negligence claim in its lawsuit
against PwC. The suit targeted the Big Four firm’s work in the 2002-2005 and 2008
audits. PwC plans to appeal Rothstein’s ruling on the FDIC’s negligence claim.

However, the court Dec. 28 also held that PwC’s auditing conduct did not amount to
a breach of contract, as the agency and the bankruptcy trustee of Colonial BancGroup
had argued. The FDIC and trustee cases were joined and tried in Montgomery, Ala.,
and Washington in the fall.

U.S. District Court Judge Barbara Rothstein also denied the Colonial trustee’s assertion
that PwC was professionally negligent in its 2008 audit of the bank. Rothstein also
ruled against FDIC on the agency’s claim that PwC acted wantonly.

Rothstein concluded that PwC “did not design its audits to detect fraud” and its “failure
to do so constitutes a violation of the auditing standards.”

Going into the trial, which was held in September and October, accounting and auditing
observers said the case could affect how auditors can be held accountable in detecting
fraud. They also saw it as a venue for clarifying a contentious area of audit oversight.

The collapse of Colonial BancGroup was one of the largest bank failures in U.S. history.

First Auditor Suit in 2008-2009 Crisis

The action by the FDIC marks its first suit against an auditor for work in checking
the books of a bank that failed during the financial crisis of 2008-09.

A trial to determine damages in the case is to be held on as yet undefined timetable.
A jury trial is to be held on the FDIC’s and Colonial trustee’s legal claims stemming
from the 2006-2007 audit years.

Crowe Horwath LLP, as internal auditor of Colonial, also faces allegations of misconduct
by the plaintiffs. A trial in that hasn’t been held yet.

PwC Pleased

“PricewaterhouseCoopers is pleased that the court properly rejected all of the claims
asserted by Colonial Bancgroup as well as several of the key claims asserted by the
FDIC,” the firm said in a prepared statement.

The firm focused in part on the judge’s conclusion that interference in the audit
by bank employees helped undermine the Colonial BankGroup trustee’s negligence claim
against PwC.

“The court’s ruling recognizes that in addition to those CBG employees who perpetrated
the fraud, numerous other employees at Colonial BancGroup actively and substantially
interfered with PricewaterhouseCoopers’s audit,” according to the PwC statement.

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